Shoppers Stop. CMP: INR339 TP: INR355 Neutral

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1 BSE SENSEX S&P CNX 20,684 6,145 Bloomberg SHOP IN Equity Shares (m) 83.1 M.Cap. (INR b) / (USD b) 28.1/ Week Range (INR) 494/331 1, 6, 12 Rel. Per (%) -7/-16/-28 Financials & Valuation (INR b) Y/E MAR E 2015E Net Sales EBITDA Adj PAT Adj.EPS.INR Gr. (%) BV/Sh INR RoE (%) RoCE (%) P/E (x) P/BV (X) October QFY14 Results Update Sector: Retail Shoppers Stop CMP: INR339 TP: INR355 Neutral Standalone sales up 25%, PAT up 55%: SHOP s standalone sales for 2QFY14 grew 25% to INR7.25b (higher than our estimate of INR6.9b). LTL sales grew 15.5% (v/s our estimate of 12%) on a low base (2% LTL growth in 2QFY13), the highest in 10 quarters. LTL volumes improved 9%. Gross margin remained flat at 35.9%. However, savings in lease rentals (down 80bp) led to operating margin expansion of 50bp to 5.5% (v/s our estimate of 5.3%). EBITDA grew 36.7% to INR398m (v/s our estimate of INR364m) and the strong EBITDA performance flowed to PAT level, despite 290bp expansion in tax rate. PAT grew 55.2% to INR99m (v/s our estimate of INR105m) on a low base (67% decline in 2QFY13). HyperCITY posts highest ever quarterly loss: HyperCITY Retail (51% stake) reported sales of INR2.2b (INR2.2b in 1QFY14). LTL sales growth was sequentially lower at 9% (14% in 1QFY14) and LTL volumes grew 1% (4% in 1QFY14). Gross margin expanded 100bp to 21.7% and store level EBITDA was INR13m (INR4m in 2QFY13). However, corporate office expenses and higher depreciation costs resulted in loss of INR258m at PAT level (INR209m loss in 2QFY13), the highest ever quarterly loss for HyperCITY. Rising losses in HyperCITY concerning: During the quarter, SHOP added two departmental stores, two MAC stores and two Clinique stores (also closed one store). Total retail space stood at 5.17msf. Same store metrics in department stores improved, which is impressive, given the subdued consumer sentiment. However, rising losses in HyperCITY remain a concern and put to question the assumption of FY15 turnaround in HyperCITY. We note that cumulative losses in the last 14 quarters were ~INR3b (Shoppers Stop standalone entity made profits of INR2.17b over this period). Maintain Neutral: SHOP trades at 33x FY15E standalone EPS. Maintain Neutral, with a target price of INR355 (SOTP: Shoppers Stop at 20x FY15E EPS, HyperCITY at 0.8x FY15E Sales). Gautam Duggad (Gautam.Duggad@MotilalOswal.com); Ruchi Rudra (Ruchi.Rudra@MotilalOswal.com); Investors are advised to refer through disclosures made at the end of the Research Report.

2 Shoppers Stop: Same store sales up 15.5%; highest in ten quarters Standalone sales grew 25.1% to INR7.3b (est. INR6.9b) as LTL sales posted 15.5% (est. 12%) growth; partly aided by low base (5% LTL growth in 1Q13). LTL volumes improved 9. For stores open < 5 years LTL sales expanded 19.7%. Same store performance stands out when viewed in the context of slowing discretionary consumption amidst the backdrop of subdued consumer sentiment and weak macros. Our channel checks suggest festive season has begun well for apparel retailers. However, SHOP won t have the advantage of lower comparators in 2HFY14. Gross margin expanded 10bp to 35.9%, however savings in lease rentals (down 80bp) led operating margin expansion of 50bp YoY to 5.5% (est. 5.3%). Strong EBITDA performance flowed through to bottom-line despite 290bp expansion in tax rate. Recurring PAT was up 55.2% to INR99mn, recurring PAT was up 55% to INR 99mn, marginally below our estimate (est. INR105mn). During the quarter, SHOP added 2 departmental stores (and closed 1), 2 M.A.C Stores and 2 Clinique stores (also closed 1 store). Total retail space stood at 5.17msf. Quarterly snapshot Key Metrics (%) 1QFY13 2QFY13 3QFY13 4QFY13 1QFY14 2QFY14 Total Area (m sq ft) Sales/sq ft - Shoppers Stop (INR) 1,616 2,091 2,080 2,109 1,708 2,262 Same store sales growth - Dept Sales growth - ALL Sales growth - dept LTL Sales growth > 5 yr old store LTL Sales growth < 5 yr old store LTL Volume Growth (%) Bought out Consignment / SOR Concession Shoppers added 6 stores in 1H14 LTL sales up 15.5%; highest in ten quarters Shoppers Stop Hypercity LTL Sales Gr (%) Dec-10 Mar-11 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar October

3 LTL volumes up, aided by low base EBITDA margins expand 50bps YoY LTL Volume growth (%) EBITDA Margin (%) Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 LTL Customer entry growth is healthy LTL Customer Entry (%) HyperCITY: LTL growth at 9%; highest ever quarterly loss HyperCITY Retail (51% stake) reported a relatively subdued performance. It posted sales of INR2.34b (INR2.3b in 1QFY14), up 16.2% YoY. LTL sales growth stood at 9% (14% in 1QFY14) and LTL volumes grew 1%. (4% in 1Q14) Gross margin expanded 90bps to 21.7% and store level EBIDTA came in at INR13m (INR4m in 2QFY13). However, corporate office expenses and higher depreciation costs resulted in PBT and PAT losses of INR258m, (INR209m in 2QFY13). It has now posted a cumulative INR3b loss in last 14 quarters. Quarterly snapshot INR m 1QFY13 2QFY13 3QFY13 4QFY13 1QFY14 2QFY14 Net Sales 1,889 1,867 1,996 1,757 2,113 2,170 Gross Profit Gross Margin (%) Store EBITDA % to sales Company EBITDA % to sales PAT % to sales LTL sales growth (%) Stores LTL volume Gr % LTL Ticket Size Gr % October

4 Valuation and view Shoppers Stop has sustained its same store recovery with double digit same store growth for the 4th quarter; albeit aided by lower base too. Despite management taking steps to improve efficiency HyperCITY s profitability remains the single biggest concern. Absence of healthy same store performance is impacting the margin metrics in our view and thus poses a question mark to our as well as street assumption of FY15 breakeven. We note that cumulative losses in last 14 quarters stands at ~INR3bn (Shoppers Stop standalone entity has made INR2.17b profits in similar period). SHOP trades at 33x standalone FY15E EPS. Maintain Neutral with target of INR 355 (SOTP: Shoppers Stop at 20x FY15E, HyperCITY at 0.8x P/Sales). 28 October

5 : an investment profile Company description Shoppers Stop (SHOP) is one of the largest department store chains in India, with 61 stores and retail space of ~3.7msf. The company is promoted by CL Raheja Group, one of the largest real estate groups in the country. SHOP has also entered specialty retail formats like Home Furnishing (Home Stop) and Beauty (Estee Lauder and M.A.C.). It also has presence in the high potential Hypermarket space through its 51% subsidiary, HyperCITY. Key investment arguments We believe SHOP is ideally positioned to benefit from the uptick in consumption sentiment. The department store format has reached critical mass and is likely to fund its capex through internal accruals, given its inventory-light model. SHOP has added 9 stores in the past one year and 18 stores in the past two years, which has impacted profit margins; recovery is likely only post FY15. The company has presence in the high potential Hypermarket space through its 51% subsidiary, HyperCITY. It has 14 stores and is likely to add two stores every year. Shoppers Stop Key investment risks Poor consumer sentiment resulting from economic slowdown can impact sales growth, as had INR m 1QFY122QFY123QFY124QFY121QFY132QFY133QFY13 happened in FY13. 4QFY131QFY142QFY14 Net Sales 1,644 1,769 1,976 1,637 1,889 1,867 1,996 1,757 2,113 2,170 HyperCITY incurred a loss of INR3b in the past 14 Gross Profit Gross Margin (%) quarters Store EBITDA % to sales -1.2 Recent developments Company EBITDA It opened 7 Shopper Stop stores in 1HFY14 % to sales PAT % to sales Valuation and -13.3view LTL sales growth (%) Stores LTL volume Gr % NA LTL Ticket Size Gr % NA SHOP trades at 33x standalone FY15E EPS. Maintain Neutral with a target price of INR355 (SOTP: Shoppers Stop at 20x FY15E, HyperCITY at 0.8x P/Sales). Sector view We have a positive view on the sector. We expect the sector to clock revenue CAGR of 20-25% over the next five years, though near-term pressures cannot be ruled out. Players with a strong Hypermarket format and presence in larger number of categories are likely to be winners. Comparative valuations Shoppers Stop Titan Jubilant P/E (x) FY14E FY15E P/BV (x) FY14E FY15E EV/Sales (x) FY14E FY15E EV/EBITDA (x) FY14E FY15E EPS: MOSL forecast v/s consensus (INR) MOSL Consensus Variation Forecast Forecast (%) FY FY Target price and recommendation Current Target Upside Reco. Price (INR) Price (INR) (%) Neutral Shareholding pattern (%) Promoter Stock performance (1-year) Domestic Inst Foreign Others October

6 Financials and valuation Income statement (INR Million) Y/E March E 2015E Net Sales 19,049 22,274 26,831 31,175 Change (%) EBITDA 1, ,614 2,112 EBITDA Margin (%) Depreciation EBIT ,097 1,533 Interest Other Income Extraordinary items PBT ,299 Tax Tax Rate (%) Reported PAT Adjusted PAT Change (%) , Min. Int. & Assoc. Share Adj Cons PAT Balance sheet (INR Million) Y/E March E 2015E Share Capital Reserves 6,069 6,368 6,841 7,559 Net Worth 6,480 6,779 7,251 7,970 Debt 3,062 3,621 3,796 3,727 Deferred Tax Total Capital Employed 9,542 10,400 11,048 11,697 Gross Fixed Assets 6,578 7,588 8,567 9,555 Less: Acc Depreciation 2,307 2,761 3,278 3,857 Net Fixed Assets 4,271 4,828 5,289 5,698 Capital WIP Investments 2,550 2,652 2,958 3,111 Current Assets 5,856 6,659 7,318 8,207 Inventory 2,036 2,350 2,623 2,887 Debtors Cash & Bank Loans & Adv, Others 3,469 3,933 4,451 4,984 Curr Liabs & Provns 3,454 3,989 4,768 5,570 Curr. Liabilities 3,344 3,926 4,667 5,417 Provisions Net Current Assets 2,403 2,670 2,550 2,638 Total Assets 9,542 10,400 11,048 11,697 E: MOSL Estimates Ratios Y/E March E 2015E Basic (INR) EPS Cash EPS Book Value DPS Payout (incl. Div. Tax.) Valuation(x) P/E Cash P/E EV/Sales EV/EBITDA P/BV Dividend Yield (%) Profitability Ratios (%) RoE RoCE Turnover Ratios (%) Asset Turnover (x) Debtors (No. of Days) Inventory (No. of Days) Creditors (No. of Days) Leverage Ratios (%) Net Debt/Equity (x) Cash flow statement (INR Million) Y/E March E 2015E OP/(Loss) before Tax ,299 Depreciation Others Interest Direct Taxes Paid (Inc)/Dec in Wkg Cap CF from Op. Activity 827 1,082 1,610 2,008 (Inc)/Dec in FA & CWIP 1, (Pur)/Sale of Invt Others CF from Inv. Activity 1,572 1,044 1,284 1,142 Inc/(Dec) in Net Worth Inc / (Dec) in Debt 1, Interest Paid Divd Paid (incl Tax) CF from Fin. Activity Inc/(Dec) in Cash Add: Opening Balance Closing Balance October

7 N O T E S 28 October

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